My impression is that many economists of all political leanings (perhaps most notably Greg Mankiw) favor a revenue-neutral "Pigovian" carbon tax as an economically optimal but politically impossible method of reducing America's carbon footprint (though I don't know where you stand on that.)
Obama has proposed a "windfall profits" tax on "big oil" to fund a "$1000 energy rebate" for consumers. You've criticized this plan for introducing unnecessary complexity and unpredictability in the tax code and reducing the incentive for investment in oil companies. Fair
enough, but how is Obama's plan effectively different from a Pigovian carbon tax? Won't new taxes on oil companies will necessarily be passed on to consumers in the form of higher gas prices?
Has Obama found a way to dupe America into taking its medicine, or is there something about taxing Exxon's profits instead of John Q Public at the pump that reduces the effectiveness of such an approach?
Let's assume that because of supply constraints, producers won't pay any of the tax. Consumers will. That means we won't be reducing the amount of oil consumed, because consumption will simply shift out of the country. So its effect on global warming will be nil.
So what's the purpose of the tax? Making America more efficient, presumably, in the hopes that other nations will eventually follow. Well, look at the way the tax is targeted and framed. The rebate is handed to low and middle income people, because those are the people who are suffering most from high energy prices. What, then, are those people likely to spend their rebate on? Ummm, energy. This is especially true since it's framed as an "energy rebate"--as Nicholas Epley has shown, how tax rebates are framed seems to matter quite a lot.
Any Pigovian Tax on energy is going to make those with lower incomes suffer the most, because those are the people who use the most energy relative to their incomes. To the extent that we aim at making the tax distributively fair, we will make it ineffective, at which point we might as well just roll the thing into the income tax structure and forget about taxing energy.
As currently structured, then, the Obama plan seems unlikely to induce much change in relative prices, supply, or demand. Mostly, what we'll achieve is creating an expensive new administrative burden. This will be a very expensive tax, in terms of the amount of administrative overhead and deadweight loss we endure for each dollar raised or ton of carbon kept out of the atmosphere.
And the implications of any "windfall profits tax" are troubling for future growth. If you want an economy that continues to innovate and expand, it is not wise to send a signal to companies that they will be punished for doing too well. Very rarely, after all, do we offer special "windfall losses" tax rebates, where companies that do particularly badly get extra tax loss abatements. Thus, any windfall profits tax functions as a profit on risk-taking. And risk-taking is what the American economy does very, very well. Note that this effect will endure, economy-wide, even if in this particular case the oil companies are able to jam the taxes down onto consumers.
At the most basic level, I am against attempting to trick the American people into accepting policies that they don't want. First, if people really are so stupid that they are unable to recognize basic self interest, or so immoral that they cannot act rightly, then probably we should not allow them to vote. Second, the complex machinations required to obscure the real purpose of the tax often mean it doesn't work so well. Moreover, they mean that when it doesn't work so well, it's hard to diagnose the problem, or fix it--having lied about the purpose of the tax, it's hard then to convince the public to change it to make it better achieve its "true" goal. And third, complexity is immensely costly. The American tax code is already such a bloated compendium of malfunctioning parts working at cross purposes that economists have a hard time figuring out what the hell its effects are. We should fight the expansion of this crepuscular behemoth by any means necessary.
This article available online at:
http://www.theatlantic.com/business/archive/2008/08/what-apos-s-not-to-like-about-obama-apos-s-quot-energy-rebate-quot/3917/
